“An industry’s prosperity cannot be decided by law”

In connection with my regular writing duties here (at one of the blogs that Alex Singleton was recently so kind about) I have been unable to avoid learning about the huge takeover battle that now surrounds Arcelor. I hazarded the guess over a month ago that Lakshmi Mittal, one of the protagonists, seemed to be doing okay, despite much opposition, and now it does indeed look as if he will win.

Cécille Philippe‘s latest piece for the Molinari Economic Institute may have been particularly inspired by this huge news story, although all that she alludes to is a “large wave of takeovers”. Anyway, she writes lucidly about the benefits of takeovers, and of the constant disciplinary effect they have upon the managers of large enterprises, concluding thus:

Takeovers make it possible to put an end to sources of loss, to increase the wealth of shareholders and thus to preserve employment which would otherwise have been lost if the company had been brought to bankruptcy for failing to satisfy its consumers. Takeovers are thus an alternative to bankruptcy which leads in a brutal way to a total reallocation of assets to better performing companies.

An industry’s prosperity cannot be decided by law, it has to be created. If one allows the owner’s deeds to be exchanged freely on the financial markets, they end up in the hands of those who think they are most capable of developing them. The reason why they are better placed than the public authorities to carry out this task is that they will have to undergo the financial consequences of their actions in the event of failure. The bureaucrats while escaping the sanction of loss and profit, cannot do other than carry out industrial projects by hazard and chance.

It is thus necessary to recognise the legitimacy of takeovers and to make sure that foreigners are free to make purchase offers. It is equally important that nationals are free to compete with them. The freer the financial market is and the more the shareholders’ right is respected, the more the industry’s prosperity depends on industrial projects being adequate to consumers’ requirements.

Most of which will be fairly obvious to the average Samizdata reader. But France is, perhaps, a country in which such obvious propositions need to be stated with particular clarity just now. Knowing Cécille Philippe a little, I not only hope but assume that she is also doing this in French.

However, Arcelor is a very special case, and Cécille is probably right not to name that particular case in this piece, because it would complicate her argument dreadfully. With Arcelor, wider considerations, as they say, are at stake. However, having now come across this earlier piece, I am surer than ever that it is the Arcelor case that she, and her, I trust, numerous French readers, have been particularly thinking about.

Of course, studies into mergers and acquisitions suggest that they are almost always a bad idea. After a merger, the resulting company almost always ends up destroying shareholder value and being worth less than the two companies were before the merger. The research is very clear on this. Mergers are often about ego, and it is usually better for a company to grow organically rather than through acquisition. (The only exception perhaps occurs when purchasing a company is the only way of obtainng scarce or monopoly assets). If a company is near bankruptcy then sometimes the shareholders in the acquired company will do better than they would have if bankruptcy simply occurred, but at the expense of the shareholders of the acquiring company.

This is not an argument about whether making mergers and acquisitions easy is good or bad for the economy as a whole (much feeling is yes, because the threat of being acquired keeps company management on its toes) which t should be allowed, or whether government should be involved in the question, however.

The whole issue is much, much less important than the question of whether you have effectve bankruptcy laws. Failed companies must be allowed to fail. If mergers and acquisitions provides some kind of avenue through which this can happen, good. But simply allowing them to fail is a better one.

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